Vanguard paper helps you set investing strategies

Updated 12:24 pm, Wednesday, April 24, 2013

After making a sizable upward move, the stock market is stalling and some are saying that this is a good time to run for cover.

"In the face of market turmoil, some investors may find themselves making impulsive decisions or, conversely, becoming paralyzed, unable to implement an investment strategy or to rebalance a portfolio as needed," says a quote from a recently released paper, "Vanguard's Principles for Investing Success." To access it, go to http://tinyurl.com/bob4g2b.

When should you sell a holding? When should you buy?

All depends on the wisdom of your personal investment strategy -- and how you arrived at it.

The Vanguard paper helps the do-it-yourself investor set a strategy for himself by focusing on a few basic but most important observations.

Here is my take-away.

First, don't try to time the market.

Since 1997, we've had three bull markets and two bear markets. During this period, market-timing mutual funds whose objective was to beat the market in any market environment have failed to achieve their goals.

Comparing these funds to a balanced benchmark of 60 percent stocks to 40 percent bonds, the results are disappointing, according to the Vanguard report.

During the first two bull periods (January 1997 through August 2000 and March 2003 to October 2007), only about one out of three funds outperformed the benchmark. During the March 2009 through December 2012 bull market, about two out if five outperformed.

During the two bear periods, results were better, but not great.

From September 2000 through February 2003, 61 percent beat the benchmark. From November 2007 through February 2009, only 44 percent outperformed.

Other market-timing methods also disappointed. Asset allocation funds, investment clubs, pension funds, investment newsletters, mutual funds and professional market timers were all market-timing casualties, according to the report.

Second, it's easy to buy an investment that's done well in the past. However, research simply doesn't support the view that you can make money that way. As the report cautions, you can't "use past success as a predictor of future success." Plus, Vanguard points out that "abandoning managers simply because their returns have lagged can lead to further disappointment."

Third, research also shows that individual investors themselves are poor market timers. According to Vanguard's report, a fund seems to draw investors only after it "starts looking hot." Vanguard concludes that, "Investor (returns) generally trail the funds they are investing in as a result of the timing of cash flows."

Instead of giving in to the allure of market timing and the temptation to chase performance, it's better to have a plan.

Without one, people tend to focus on investment selection piecemeal. They are drawn to a particular fund that is attractive, buy it, often without thinking about how it fits in their overall allocation, according to the report.

"While paying close attention to each investment may seem logical, this process can lead to an assemblage of holdings that doesn't serve the investor's ultimate needs," noted the report.

"As a result, the portfolio may wind up concentrated in a certain market sector, or it may have so many holdings that portfolio oversight becomes onerous. Most often, investors are led into such imbalances by common, avoidable mistakes such as performance-chasing, market-timing, or reacting to market `noise.' "

The better way is to develop your own personal strategy, which comes after you educate yourself on the type of information we just discussed and more.

You might also read my sixth book, "Managing Retirement Wealth," which contains a detailed study of returns during different market periods, including top and bottom performers during the "lost decade," the important historical 10 year period that contained two bull and two bear markets.

Remember to invest in your financial education before you invest in a stock, bond or mutual fund.

Julie Jason, JD, LLM, award-winning author of "The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad," and "Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad," is principal of Jackson, Grant Investment Advisers, Inc. of Stamford. Please e-mail her with questions at readers@juliejason.com or write to her c/o The Advocate, 9A Riverbend Drive South, Box 4910, Stamford, CT 06907. Copyright 2013 Julie Jason.